Ryan Avent: QE sera sera (why money is too tight and in 1999 Bernanke understood that)

THIS week’s print edition includes a long primer on QE. Asset-purchases have been the principal unconventional monetary policy tool deployed by rich-country central banks in this crisis, and their use is once again ramping up; the Bank of England just scaled up its QE plans by £50 billion, the Fed may use its next meeting to pivot from “Twist” operations back to QE proper, and the ECB’s recent interest rate moves have some suggesting that QE could be on the table there, as well. 

(…)By the late 1990s, Japan was suffering from persistent deflation. As a first response, it deployed the zero-interest-rate-policy (or ZIRP), in which it promised to keep short-term rates at zero “until deflationary concerns subside”. That didn’t have much of an effect, which led Mr Bernanke to complain that:

A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase “until deflationary concerns subside”? Krugman…and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation.

The above quote is from a “don’t miss this” piece by Ryan Avent of The Economist. Ryan was prescient in that two months later we know that the ECB has adopted a “radical” (for ECB) new policy not too distant from Bernanke’s advice to BOJ. And at the US Fed Bernanke has announced a similar significant new policy.

Ryan concludes his review of Japan’s mistakes, Bernanke’s excellent advice 1999 to BOJ, and where we are today: 

(…) That is the heart of the matter. In the bitterest of ironies, Mr Bernanke is giving America a Japanese recovery. He is doing so, seemingly, because pushing inflation temporarily above an arbitrary target is an unthinkable prospect, even though doing so would almost certainly, by his own convincing argument, have a huge impact on America’s enormously costly unemployment problem. I suspect that the Ben Bernanke of 1999 would characterise this as a moral and intellectual failure of staggering proportions. Maybe the Ben Bernanke of 2012 has a convincing rebuttal; if so, he certainly hasn’t shared it with us. Maybe one day we’ll all be lucky enough to hear it. It had better be one hell of a good excuse.

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